Dan Thornton of the Federal Reserve Bank of St. Louis just completed a very revealing paper called What Does the Change in the FOMC’s Statement of Objectives Mean? in which he traces FOMC references to the Fed’s mandate over many years. He documents a historically significant recent shift in the language with important legislative and policy implications. Until very recently the FOMC policy statement did not explicitly mention the “maximum employment” part of the dual mandate in the Federal Reserve Act. FOMC members preferred to refer to the goal of price stability and its role in creating strong economic and employment growth.

But on September 21, 2010 the FOMC changed the policy statement by starting to refer explicitly to “maximum employment.” It did so again following the November and the December FOMC meetings. The change coincides with efforts to promote QE2 and thereby provides factual evidence that the dual mandate was a factor in gaining support for this unconventional large-scale asset purchase program, an issue which has been debated recently as I wrote about here.

Dan Thornton also goes back further in time, documenting changes in the FOMC Directive. He finds no references to “maximum employment” from 1979, when Paul Volcker took over as Fed chair, until the language was inserted in the December 2008 Directive, just as the Fed was embarking on its first large scale asset purchases program, now called QE1.